Wachovia
Presents: The Week
Market Commentary
August 18, 2008
In this issue of The Week, we review the Fed's problem
of rising commodity prices and the weak dollar, suggesting inflation
problems, and the simultaneous weakness seen in the economy. Earlier
this summer, we suggested that policy makers were on the "horns
of a dilemma". If they addressed inflation worries by raising interest
rates, there was risk of causing a severe recession. If, instead, they
focused on the slow economy, they risked rising inflation expectations,
which could prompt higher long-term interest rates. The recent action
in commodity markets and the dollar suggest that inflation worries have
subsided, which will allow the Fed to focus on the economy and should
be supportive for US equity markets.
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